Thursday, 19 July 2018

The Fed factor

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  • Divyang Shah, Columnist

A search for answers from Wednesday’s FOMC minutes…

The US government shutdown and lack of agreement on budgetary issues partly supported the FOMC’s decision to hold off from tapering in September.

The minutes of the September FOMC meeting will provide clues as to the Fed’s thinking and the extent to which the no tapering outcome was a close call.

At this stage the odds of an October taper look very slim leaving December as a more likely month for tapering to begin.

The minutes of the Sept 17/18 FOMC meeting are released this Wednesday. Ahead of the meeting market expectations had been that the Fed would start the tapering process even if this was by as little as US$5bn. Fedspeak since the meeting has done little to clear the fog as to why the Fed failed to walk-the-walk after talking-the-talk.

There are many questions that the markets will be looking for answers to including…

  • How much of a close call was the Fed’s decision?
  • What additional information are they looking at in order to start tapering?
  • What are the risks that they will taper before year-end?
  • Did they discuss the speed and composition of tapering if and when it does start?
  • Is the Fed still looking to end QE sometime in mid-2014?
  • Were there any discussions on strengthening the forward guidance language?
  • Is there more colour on the recently introduced fixed-rate-full-allotment reverse repo facility?

With the market pre-occupied with the US shutdown and a lack of US data the FOMC minutes could have more of an impact as they will inject new news into an otherwise dull trading environment. A December, rather than September taper, still looks more likely especially as the data will not provide much in the way of new information for the Fed by the Oct 29/30 meeting. The risk is clearly that the shutdown persists, making the Fed more hesitant to taper. That could push the start of QE into next year as well as prompting markets to adjust their expectations toward QE ending sometime in the latter half of 2014.

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